Palm Coast, Florida - During the real estate boom of 2001 through 2005, many sectors of the market increased well over 20% annually. In Grand Haven's north section, lots purchased for $100-120K sold in just two years for nearly $200K. Grand Haven Intracoastal lots in Front Street village increased from $180,000 in 2000 to over $500,000 in 2005. For two successive years, Intracoastal lots in Palm Coast Plantation saw a 25% increase in value. People who were in the right place at the right time did very well. But the same statement could be made about stock market investors or even a few visitors to Las Vegas casinos. Timing and knowledge are vital. And a little bit of luck always helps.
In another article, I discussed the difference between the highly efficient and liquid stock market and the inefficient, illiquid real estate market. The stock market and the real estate market have both investors and speculators. And the real estate run-up attracted new blood much as the stock market bubble inspired novices to become day-traders. The nearest real estate equivalent to the day-trader is the flipper. Private (gated) communities present speculators with additional issues. Association fees, deed restrictions, and club membership options increase carrying costs and can reduce selling flexibility.
Non-Ad Valorem assessments - Private communities typically have Homeowners Associations and Community Development Districts (CDD). They are responsible for architectural integrity, enforcing Codicils, Conditions, and Restrictions (CCRs), security, common area and community center maintenance and operations. These entities assess each property owner equally for the costs associated with these activities. These are called Non-Ad Valorem assessments because they are not based on real estate values.
For example, in the most recent tax year Grand Haven's annual assessments were nearly $1,700 per property (including vacant lots). For several years, Palm Coast Plantation's annual assessment was just above $600 per year. But when the developer relinquished control of the Homeowners Association to the residents it was discovered that the developer had been subsidizing the association. To make up the shortfall, the homeowners association found it necessary to increase the annual assessment to over $1,400.
Another factor often overlooked by novice speculators is the common practice of having build-out requirements in the CCRs of planned communities. Most speculators plan to flip their lot investment soon, so a three or four-year build-out requirement is perceived as inconsequential. But, if the market sags, the upcoming requirement to build can loom large, placing additional pressure to sell while, at the same time, limiting the potential buyer pool to those willing to commence construction immediately.
At The Conservatory, a Ginn development, the developer is working with the homeowners association to extend the build-out requirement by amending the CCRs. LandMar extended the build-out for their latest Grand Haven subsection, Wild Oaks, from three to four years . Unfortunately, they required Wild Oaks buyers to close in December 2005 when roads and other infrastructure were not in place. Infrastructure is just now being completed in the furthest reaches of the development. Of course buyers have been free to sell their lots over the past 17 months but home construction could not begin in some areas until 2007. And potential buyers have been unable to easily inspect many properties until recently.
Making some basic assumptions on commission, closing costs, down payment, and carrying costs, the buyer of a $255,000 lot in Wild Oaks would have to sell their property for approximately $325,000 to break even (net) after two years. To do this, the property's value must increase by 13% annually. Each additional year adds about $20,000 to the cost basis. Lots, unlike dwellings, can't be rented to offset carrying costs.
Most gated communities offer one or more featured amenities on an a la carte basis - not included in the annual assessment. In LandMar's local communities, golf membership is extra. In Ginn's communities, both golf and Beach Club memberships are extra. Typically, those buying property directly from the developer are offered a finite time period after the original purchase to exercise their membership option. If the enrollment period lapses, future membership may not be available, reducing the property's value. Protecting the value and future saleability of a lot could require a large additional investment (initiation fee) plus substantial monthly dues which increase carrying costs. Some savvy investors living near their property make use of the membership privileges as a side benefit of their investment.
Today there is a surplus of gated lot inventory and a dearth of sales. Many who purchased lots with plans to flip for a profit are facing some hard facts and harder decisions. Their lots have been listed for a long time and there are practically no buyers (at the currently listed prices). Yet, only a few lots are currently listed at prices below their original cost. The Flagler County delinquent tax roll was recently publicized. It included 100 of the 340 homesites in one local development. In reality, most delinquent taxes are paid after the first publication of delinquency. Still, 100 property owners are sufficiently stressed to have yet paid their taxes.
You can't have a buyer's market when sellers are unwilling to sell at the market price. I suspect that some gated community lot sellers might now entertain aggressive offers. Listing prices for many lots will be reduced in the near future. When this happens, the buyers will show up. This is not to question the long term viability of any local developments. It only warns that the road to a successful development is sometimes paved with regretful investors.
Palm Coast and Flagler County planned communities are being developed with rich amenity packages by quality developers. They will continue to have strong appeal to the retiring affluent baby boomer generation. Flagler County real estate continues to be competitively priced when compared to other coastal, warm climate markets. The commercial real estate sector is showing strength. Many new stores and restaurants are arriving in Palm Coast, making it a more attractive place to live. I continue to be bullish for the long term.
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